Directors still liable, despite insolvency
However, not all environmental liabilities can be discharged through insolvency proceedings
THE environmental liabilities of insolvent companies are not specifically regulated by environmental and insolvency laws. The National Environmental Management Act 107 of 1998, the Companies Act 71 of 2008 and Insolvency Act 24 of 1936 are relevant but environmental liabilities do not fit neatly into the existing categories of claims which may be lodged against an insolvent company. In terms of these laws shareholders, directors and lenders could be held responsible for the environmental liabilities of insolvent companies.
Not all environmental liabilities can be discharged through insolvency proceedings. In the US a distinction is drawn between (a) obligations to make payment for non-compliance with environmental laws; and (b) situations where the obligations of the debtor require performance rather than financial restitution. The former is considered to be a “claim” for purposes of insolvency and can be discharged during proceedings. The latter, however, is more complicated. If the governing legislation only permits the defaulting party to correct the non-compliance by taking measures, then a claim cannot be discharged through insolvency proceedings. Where the legislation permits the state to correct the non-com- pliance and reclaim the costs from the relevant party, a claim can be submitted and the environmental liability discharged during proceedings.
The National Environmental Management Act permits the relevant authority to step in, implement the required reasonable measures and claim the remediation costs back from, among others:
Any person in control of the land or any person who has a right to use the land at the time when the environmental liability arose;
Any person who negligently failed to prevent the environmental liability; and/or
Any person who “benefited” from the action being taken to remedy the environmental liability.
In the US, shareholders have been found to exercise control (although not in the insolvency arena) where they exercised domination over a subsidiary to effect a fraud or delict or supervised the unlawful disposal of hazardous waste. In SA, “control” could be exercised through the social and ethics committee required by the Companies Act. The committee is tasked with monitoring the company’s activities, compliance with legislation and codes of good practice relating to, among others, the environmental impact of the company. The committee must inform the board and report to the shareholders at the annual general meeting. In this way, the shareholders are aware of the company’s activities and will be required to take reasonable measures needed to avoid liability.
Imposing liability on shareholders for negligence presupposes that the shareholders held a certain degree of knowledge over the operations of the company and (despite this knowledge) failed to take reasonable measures to prevent such environmental liability.
Costs can be reclaimed from any person who has “benefited” from the measures taken to remedy the company’s pollution. Shareholders may “benefit” where they receive a dividend while the company still has outstanding environmental liabilities or where the state remedied any liabilities.
Directors should be encouraged to make commercial decisions and take risks without fear of liability provided that such decisions are in the best interests of the company. Where these decisions cause environmental liabilities, directors could be liable in terms of the National Environmental Management Act in situations where the director ought to have taken, but negligently failed to take, reasonable measures to prevent pollution or environmental degradation.
Director liability for environmental harm has recently been imposed in a case in Limpopo where the MD of a mining company was held criminally liable in terms of Section 34 of the National Environmental Management Act after commencing a listed activity without environmental authorisation. It was the first South African case in which directors were held responsible for environmental misdemeanours.
Although the National Environmental Management Act is broad enough to impose liability on lenders that exercise “control” of the land or premises on which pollution or environmental degradation occurs, they could possibly avoid liability where it exercises its security by showing that it has taken all commercially reasonable efforts to divest of the facility within a reasonable time, and on commercially reasonable terms.
Acting in accordance with the Equator Principles and general sus- tainable banking good practice should be sufficient to protect lenders against liability for negligence.
Lenders benefit from a transaction if they receive fees or interest on the loan amount arising from transactions. This is a benefit in the course of business and the possibility that it could be deemed a “benefit” from a pollutioncausing activity must be remote.
It is conceivable that a party may benefit where remedial measures are undertaken by the state and the lender holds and sells the property in execution as a result of the debt by the borrower not being paid. In this case, the lender would benefit as it is able to sell the property at a greater value than it would have had the remedial measures not been undertaken.
CLEANING UP YOUR OWN MESS